(CNN) --In the 1950s, the revolution was all about rock 'n' roll. The 70s brought punk and disco. And sometime this decade, the rebellion shifted from the music genre to the digital domain.

Signaling a new era of media distribution, Forrester Research on Tuesday released a study predicting an even bigger drop in compact disc sales as Internet music file-sharing keeps gaining ground on the flagging CD.

Twenty years after its introduction, the CD is no longer hip. From 2001 to 2002, Nielsen SoundScan estimates that 62.5 million fewer were sold -- a 9 percent drop to 649.5 million. Plummeting CD sales have forced record shops to close. And the music industry is scrambling to lift sales -- fueling the growth of new digital music services and suing hard-core file sharers.

Downloadable future

Forrester's survey of 4,782 adults and 1,170 young people finds about 20 percent of all Americans download music from the Internet. Half of the downloaders say they're buying fewer CDs. The study forecasts that in five years, about a third of music sales will come from downloads, and CD sales will drop 30 percent from their 1999 peak.

"On-demand services are the future of entertainment delivery," said Josh Bernoff, principal analyst at Forrester. "CDs, DVDs, and any other forms of physical media will become obsolete."

The survey did find some bright spots for music executives. It shows that the industry might ultimately be helped by pursuing lawsuits against heavy file sharers. More than two out of three young downloaders told Forrester they'd stop if they risked jail or a fine.

At least 10 Windows-based music services are expected to emerge in the next nine months, the report said, and by the end of 2004, downloads and on-demand subscriptions may bring in $270 million. If the trend continues, three years from now digital music sales could account for $1.4 billion of the music industry's $12.8 billion in expected revenues.

Music companies are also trying new tactics to keep CDs alive. Last year, for example, Interscope gave a DVD to the first million shoppers who took home 'The Eminem Show' CD. They're also trying out new, more expensive technologies such as the super audio CDs and DVD audio, both of which profess to offer superior sound than the plain old CD.

"The CD is turning out to be a transitory sort of item," said Roy Trakin, senior editor of Hits magazine, a California-based tipsheet covering the music business. "The future of the CD may be in its enhanced content -- in a hybrid CD DVD and the more upscale formats like DVD audio and super audio CDs."

Movies, TV take note

The report urges movie and television companies to take notice of what's happening with music. One in five young file sharers has downloaded a movie, Forrester says, and among downloaders with more than 400 files, 70 percent had at least one video file.

In the coming years, growing access to digital video on-demand in U.S. homes and the hassle of late fees and trips to the store will push many customers away from video rental shops, Forrester says. By 2007, the research group estimates that video rental revenues at Blockbuster and Wal-Mart will drop 37 percent. And by 2008, overall revenues from DVDs and tapes will drop 8 percent.

"Consumers have spoken -- they are tired of paying the high cost of CDs and DVDs and prefer more flexible forms of on-demand media delivery," Bernoff said.

"Piracy and its cure -- streaming and paid downloads -- will drive people to connect to entertainment, not own it," the report concludes.